Property Watch: Have governments and other would-be tamers of the real estate market gone too far?

With housing entering a bear market, moves to curb high prices and mortgage debt are taking their toll

Despite a slowdown across the country, particularly in Metro Vancouver, which recently saw home sales plummet to their lowest annual total since 2000, policy-makers remain intent on depriving the housing market of much-needed oxygen in 2019.

At the federal level, a mortgage stress test has eroded purchasing power by an estimated 20 percent, interest rates have tripled, and buyers must now pass another stress test, on home equity lines of credit. But the “the job isn’t nearly finished,” a disgruntled Evan Siddall, head of Canada Mortgage and Housing Corp., tweeted in December.

Siddall has taken a public and unprecedented stance against high housing prices and debt loads. His goal: remove the stimulative juice that has allowed Canadian debt levels to swell to 100 percent of GDP, according to Statistics Canada, and home prices to inflate well beyond income growth.

For example, today chartered bank–insured mortgages make up 39 percent of the total, the CMHC reports. That’s way down from a whopping 59 percent in 2013, a significant reduction of taxpayer exposure.

Siddall’s take: “All that’s been done is that we have halted the dangerous march to even higher house prices and excess household borrowing. Economic sustainability requires these figures to ease off.”

And ease off they have. Household debt growth has been quickly tapering: last October it slowed to 3.32 percent year-over-year, the Bank of Canada notes, the weakest such rate since 1983.

The higher private debt climbs relative to income, the more dependent the economy becomes on the former to fuel growth, and the more vulnerable it can be to even a mild slowdown in the rate of change of debt. So it shouldn’t come as a surprise that Canada is feeling the effects already.

Last year car sales posted their first annual decline since 2009, data from Ontario-based Des Rosiers Automotive Consultants reveal. Building activity continues to slow, and wage growth slid to 1.49 percent as of December, Stat scan shows—lower than inflation and inadequate to support rising debt service payments.

All of this helped push Metro Vancouver home prices down 6 percent last June through December, according to the Real Estate Board of Greater Vancouver, sending a warning signal to the rest of the province.

Despite these impacts, Siddall has a powerful ally. As the Financial Post’s Kevin Carmichael reported, Bank of Canada governor Stephen Poloz recently agreed that Canadian debt levels and home prices need further reining in. Poloz said he would “argue forcibly against” efforts to roll back the B-20 mortgage stress test and other measures aimed at improving debt “quality.”

And so as housing enters a bear market, we’re left wondering: just how far are policy-makers willing to go? Everyone from the CMHC and the BoC to the federal and provincial governments has applied pressure. With the weight of their policies mounting and the market gasping for air, will anyone come to the rescue?